Little relief for pension agency's growing burden

AugustCole

SAN FRANCISCO (MarketWatch) -- "Have a hard head and thick skin."

That's the advice Bradley Belt offered his successor at the Pension Benefit Guaranty Corp., the federal agency that insures 44 million Americans' private pension plans. Attached to those plans are a daunting $450 billion in potential retirement liabilities -- a fiscal and political hot potato no one wants to touch.

Belt, who pulled no punches whenever discussing the PBGC's increasingly precarious finances, left his job in late May before Congress could hammer out a plan to cope with the agency's $23 billion deficit.

A 2004 law provided a stopgap using higher-yielding corporate debt when calculating liabilities and other measures to favor struggling airlines and steel companies as they dumped responsibility for costly pensions on the federal government.

The next step came in 2005, when lawmakers approved raising the premiums corporate employers pay to $30 from $19, and charged $1,250 per worker for terminated retirement plans thrust on the PBGC.

Belt's replacement, former congressman Vince Snowbarger, isn't a permanent appointment, raising uncertainties over the agency's leadership. At the same time, it remains to be seen whether Congress can devise more than a quick fix for the PBGC before it is overwhelmed by the growing number of companies handing it their broken pension plans.

Delta Air Lines
DALRQ
said Friday it plans to be next in line with the termination of its pilots' pensions.

"The defined benefit plan, which many of the Baby Boomers grew up with -- for many of them it will not be available," said Rep. George Miller, D-Calif.

The PBGC currently holds assets worth $56 billion and is managing to send monthly checks to the 682,820 retirees that count on it to help pay the bills.

But a cursory glance at the nation's troubled airline or auto sectors shows a growing number of companies poised to offload their defined-benefit pension plans on the agency. Each default brings in new assets, but also adds a far greater burden of future liabilities.

"When you swallow a pension plan, it helps the PBGC in one sense and hurts it in another," said David John of the Heritage Foundation. Assets end up in the hands of the agency -- a short-term help. But simultaneous growth of long-term liabilities raises the likelihood that taxpayer will some day be called on to bail out a swamped PBGC.

According to PBGC estimates, it faces $108 billion in what it calls "reasonably possible exposure" to failed pensions. Most of the risk, 66%, is linked to manufacturers, 16% comes from transportation companies, and the remaining 18% is tied to other sectors of the economy.

But the gap between what PBGC-insured plans have promised to workers and what they lack in funding tops $450 billion, a level it's been stubbornly stuck at since late 2004.

That gap began widening at an alarming rate in 2002 following the first of the five biggest claims ever placed on the PBGC. Bankruptcies that year at National Steel and LTV Steel, US Airways Group
LCC, -0.50%
and Bethlehem Steel in 2003, and United Airlines
UAL, +2.56%
and US Airways' second trip to bankruptcy court in 2005, blew it wide open.

Once the cornerstone of a career, pension plans are going the way of lifelong employment at the same company.

"The interesting fact now is that Social Security is the most secure leg of the retirement stool available to people in this country. I don't think there's any other pension plan in America that can tell you that it's going to be there 75 years from now and be able to pay out 80% or 100% of the benefits," Rep. Miller said.

At the corporate level, it's hard to gauge the health of a pension plan. At the same time, the Employee Retirement Income Security Act (ERISA) deliberately veils this information, according to Olivia Mitchell, a professor at the University of Pennsylvania's Wharton School and director of the Boettner Center for Pensions and Retirement Research.

"We still can't get easily a company's termination status," she said. "That was intentional in ERISA."

Congress sets the rules governing the PBGC but provides none of the funding, tossing that task back to employers who are increasingly unwilling to foot the bill. This awkward structure makes it unclear who has responsibility for shoring up the PBGC if it runs out of cash.

Rep. Miller said that he had not looked into the mechanics of a bailout.

But a loan of some kind would be likely if it came to that, according to Heritage Foundation pension expert David John.

Unlike the Federal Deposit Insurance Corp., the PBGC cannot borrow money from the Treasury, he said. The federal flood insurance program, in a similar bind, was depleted by claims following Hurricane Katrina. Congress, after pumping in emergency funds, is still trying to figure out how to make it solvent again.

If the PBGC is allowed to tap the Treasury, how would it pay it back? There is no ready answer.

"The trend right now is if the PBGC only deals with defined benefit pension plans, and that universe is shrinking, you have fewer and fewer people to pay back those loans," said John.

Belt warns that a failure by the PBGC would be more "draconian" than the long-term insolvency of Social Security, where payroll taxes would cover 75% of benefits.

"In our case, there would be a much lesser percentage of benefit payments that would be replaced by premium revenues at that point in time," he said.

Currently, pension insurance premiums paid to the PBGC total about $1.5 billion a year, a level likely to soon be raised by lawmakers.

In the case of a bailout, however, asking healthy companies to pay even higher premiums to the PBGC won't fix the problem.

"Then Congress would face a decision whether or not taxpayer monies or some other revenue sources would be used to continue to provide benefits to participants the PBGC has become responsible for," said Belt.

Tapping taxpayers is what's expected in most corners.

Wharton's Mitchell points out that when the 1986 savings and loan industry meltdown drained the Federal Savings and Loan Insurance Corp., Congress set up the Financing Corp. to help fund it. But then it ended up massively in debt, spawning yet another set of laws.

"Nobody recognized the size of the problem at the outset. Congress then acted step by step," she said.

It took several years after the FSLIC was shut down in 1989 to calculate the true cost of the bailout, but it was abundantly clear that the American public bore the brunt of the cost.

According to an FDIC report in 2000, overall losses from the S&L crisis totaled $153 billion. Of that, taxpayers paid $124 billion.

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